Section 6: Demand Determinants

Demand can increase or decrease. In this case, the demand curve shifts to the right or to the left, respectively. The following are reasons:

1. A change in buyers’ real incomes or wealth.
When buyers’ incomes change, we distinguish between two products: normal products and inferior products.

The demand for a normal product increases if buyers experience an increase in real incomes or wealth. If buyers’ real incomes increase, they can afford to purchase more electronic devices, clothes, food, and other products. Consequently, the demand for these products increases.

However, some products may experience a decrease in demand as buyers’ real incomes increase. These products are called inferior products. A person who is forced to eat macaroni and cheese each day on a minimal budget may choose to buy steak when her/his income increases. This means that the demand for macaroni and cheese decreases as this buyer’s income increases. In this case, macaroni and cheese is considered an inferior product, and steak is considered a normal product. Another example of an inferior product is public transportation. Typically, as buyers’ incomes increase, the demand for public transportation decreases (and vice versa).

2. Buyers’ tastes and preferences.
As a product becomes more fashionable or useful, its demand increases. DVD rentals, cell phone features, fat-free mayonnaise and ice cream, online products, and virtual reality games have gained in popularity and have experienced increases in demand. As some products gain in popularity, others lose. The demand for these products decreases.

3. The prices of related products or services.
Consider the market for potato chips. The demand for it will go down (assuming no other changes) if the price of a related good, for example, pretzels, decreases. Potato chips and pretzels are so-called substitutes.

If the price of a substitute decreases, then the demand for the other product decreases (and vice versa). A related good can also be a complementary product. This is a product consumed not in place of, but along with, another product. A decrease in the price of potato chips increases the demand for potato chip dip. If the price of a complementary product decreases, the demand for the other product increases (and vice versa).

4. Buyers’ expectations of the product’s future price.
If a supermarket announces that toilet paper will become more expensive in the near future, more people will buy the product now (and vice versa). This increases current demand, and shifts the demand curve to the right. This will have the eventual effect of actually increasing the real price in the short run (an increase in demand increases the price). It is a self-fulfilling expectation, a common phenomenon in economics.

5. Buyers’ expectations of their future income.When buyers expect their income to increase, they will increase their demand for normal products and decrease their demand for inferior products. Many people anticipate their future increased (or decreased) incomes by changing their consumption habits now.

6. The number of buyers (population).
If the population of buyers of a certain product increases, we experience an increase in the demand for that product. With the aging of the Baby Boomers we can anticipate a rise in the demand for products that senior citizens typically purchase (insurance, health care, travel, nursing care). If we experience another baby boom, the demand for baby products will increase.